Several bankruptcy partners at law firm Morrison & Foerster have put together a primer on the major concerns that would arise in a GM bankruptcy. Deal Journal understands that most of our readers wouldn’t have access to such a handy guide, which the cheekily nicknamed MoFo usually provides to its clients, so Deal Journal summarized the high points below. The law firm warns that its thoughts are based on comparable bankruptcies and that the memo is only a preliminary overview. The headlines and summaries below are written by Deal Journal based on MoFo’s research.

Financing

Wild Card: The U.S. Government: The U.S. government has never been a lender in a debtor-in-possession, or DIP, facility. DIPs are the loans that help companies emerge from Chapter 11. The Treasury might be a direct lender to GM or it could guarantee loans provided by other lenders. Either way, the government would likely get a “super priority” claim that would have to be paid off before any other GM creditor. That would be good for taxpayers.

But the government wouldn’t just be a lender. It would essentially control the entire Chapter 11 process. It could charge fees and change the covenants on GM’s existing loans.

MoFo’s bottom line: it will be crucial to understand how the DIP will be structured, and how much leeway Treasury will have to control or dispose of any of GM’s unencumbered property.

Loan Trading: GM’s debt situation looks bleak, and bondholders haven’t been eager to be brought to heel. Many banks still trade GM’s loans, as do funds called “CLOs” that trade many securitized loans. Those banks and funds will have to watch carefully to see if GM treats them like second-class citizens because they own and traded the debt before any official Chapter 11 filing.

GM’s existing lenders may be able to participate in the DIP financing, if the GM DIP looks like other recent DIP facilities approved by a bankruptcy court. If that happens, then the GM DIP could include both “new” money from the government and a “roll-up” that would allow existing lenders to put up more cash and perhaps get better terms. This was the strategy that Simpson Thacher & Bartlett used to unite the 500 lenders in the $8 billion DIP loan that helped Lyondell’s North American business emerge from Chapter 11.

GM, the Autopsy

The Infamous 363 Sales: Some mainstream readers may have picked up the jargony term “363 sales,” which are simply companies or assets sold off in bankruptcy court. GM, by virtue of its many businesses and distress, will provide similar opportunities for bargain hunters. Such sales usually are free and clear of any legal claims on the rest of the company, which is a tremendous benefit for buyers when it comes to a company as burdened as GM. Usually, 363s take about 30 to 45 days, according to MoFo. That is light speed in the world of restructuring. Abundant advance preparation will be the key for potential buyers looking to pick off any GM assets.

Pensions

The Song that Never Ends: If GM goes down, it could take the Pension Benefit Guaranty Corp., which guarantees the nation’s pension plans, with it. The PBGC simply doesn’t have enough money to guarantee GM’s pensions. As a result, the agency13500 would need a bailout of its own before it could help GM. The auto maker’s pension situation is dire. It has $98 billion in pension liabilities and $84.5 billion in assets to back them up, a $13.5 billion shortfall, according to statistics cited by MoFo. That’s more than 311,000 fully loaded Chevrolet Silverado pick-up trucks.

GM could take its cue from the bankruptcy of LTV Steel and reclaim all responsibility for its pension plans after it emerges from Chapter 11. GM could then renegotiate with the United Auto Workers union for better terms. However, that would also mean that GM would need more money from the U.S. government or a larger DIP loan to cover the costs of unwinding its pension plan.

Overseas

MoFo notes that if GM files for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code, the auto maker may not include its foreign affiliates. In fact, GM may be preparing to sell some of them.

The WSJ’s Liz Rappaport first revealed that Lewis testified that he was pressured by Paulson and Federal Reserve Chairman Ben Bernanke to avoid disclosing the government’s bargain to inject money into Bank of America in return for following through on the acquisition of Merrill Lynch.

The issue is what Paulson said and when he said it, and why.

Paulson told Cuomo’s office that he made the threat to remove Bank of America’s management and board at the request of Mr. Bernanke, according to Cuomo’s letter. Our colleagues also reported in February that a Federal Reserve official called Lewis, threatening to remove Bank of America’s management at least three days before Paulson gave the same warning. The Fed, as BofA’s primary regulator, actually did have the authority to remove management.

Paulson initially asserted to Cuomo’s investigators that he couldn’t answer questions about the threat to Mr. Lewis (of losing his job and his board’s jobs) because he was speaking on behalf of Bernanke and the Fed had asserted privilege over those conversations, says a person present at the interview. He later answered.

This privilege is something the Fed evokes to protect confidential information that banks provide to their regulator.

Cuomo’s letter stated in part:

In an interview with this Office, Secretary Paulson largely corroborated Lewis’s account. On the issue of terminating management and the Board, Secretary Paulson indicated that he told Lewis that if Bank of America were to back out of the Merrill Lynch deal, the government either could or would remove the Board and management. Secretary Paulson told Lewis a series of concerns, including that Bank of America’s invocation of the MAC would create systemic risk and that Bank of America did not have a legal basis to invoke the MAC (though Secretary Paulson’s basis for the opinion was entirely based on what he was told by Federal Reserve officials).

Paulson provided two responses, which contrasted slightly with each other. The first said:

Their discussions centered on the Fed lawyers’ opinion that the merger contract was binding, and the US Treasury’s commitment to ensuring that no systemically important financial institution would be allowed to fail. Secretary Paulson’s words were his own. Chairman Bernanke did not instruct him to indicate any specific action the Fed might take. By referring to the Fed’s supervisory powers, Paulson intended to deliver a strong message reinforcing the view that had been consistently expressed by the Fed, as Bank of America’s regulator, and shared by the Treasury that it would be unthinkable that Bank of America take this action for which there was no reasonable legal basis and which would show a lack of judgment.

In a separate conversation, Secretary Paulson said he could not provide a letter because there was not yet a specific action plan and he believed that Treasury releasing a vague letter reiterating Treasury’s public commitment to prevent systemically important institutions from failing would not help Bank of America but would instead rattle markets by creating more questions than it answered. Questions of BofA’s disclosures were left up to Bank of America.

The second statement followed a couple of hours later:

To clarify the earlier statement, Secretary Paulson does not take exception with the Attorney General’s characterization of his conversation with Ken Lewis. His prediction of what could happen to Lewis and the Board was his language, but based on what he knew to be the Fed’s strong opposition to Bank of America attempting to renounce the deal.

It is judgment day for U.S. banks, as federal bank regulators prepare to announce the end of “stress tests” that will gauge their ability to withstand a prolonged downturn. The full results will be announced May 4.

Executives at the 19 banks being tested are fretting — but perhaps shareholders and taxpayers should be more worried, considering the track record of the past year by the U.S. government that administered these tests.

Deal Journal has an abiding interest in the business of deals, no matter who makes them. The U.S. government is relatively new to the M&A game compared with Wall Streeters; unfortunately, the government’s inexperience is on display in awkward results in deals it brokered.

In three tests of deal-making prowess in the past year, the U.S. Treasury and Federal Reserve didn’t earn passing marks, as judged by market reactions and the damage to U.S. and world markets, investors and taxpayers. We are, of course, talking about Bear Stearns, Lehman Brothers Holdings and Merrill Lynch. What is more, the government set an alarming pattern of controversial and punitive deal-making decisions that, taken together, may shake the confidence of those hoping federal efforts can get the banking system back on track.

It was the U.S. Treasury’s decision, with the support of the Federal Reserve, to sell Bear Stearns to J.P. Morgan Chase for $2 a share that prompted a raft of shareholder lawsuits, and a later renegotiation of the price to $10 a share. The deal could have been done at $10 a share, as history showed, but the Treasury insisted on $2 a share to “punish” Bear and its shareholders for moral hazard; that price put the wrong value on Bear, as the market soon showed. And it was the Treasury’s decision to let Lehman Brothers Holdings fail while rescuing American International Group, Fannie Mae and Freddie Mac, , a baffling decision that put the credit markets into a deep freeze for months and prompted more shareholder suits and inquiries over Lehman’s “missing” money. It could have happened another way; the government was already saving some companies, so to single out Lehman Brothers to be the single chosen failure was not, to anyone’s mind, necessary, and it has never been fully explained. And it was the Treasury’s decision to force Bank of America to hide $138 billion in government guarantees and infusions and delay the disclosure of Merrill Lynch’s $22 billion in fourth-quarter losses.

Shareholders have sued Bank of America over the acquisition, and it is unclear how those suits may or may not be influenced by the fact that the bank says its actions arose from a direct government directive. BofA CEO Ken Lewis has been criticized for not standing up to the government and being afraid to lose his job.

In each case, the government said its motivations were “moral hazard” and “systemic financial risk,” which were inarguably for the public good and served to keep Wall Street’s objections at heel. What the results of the government’s efforts have shown, however, is that moral hazard and systemic risk are in the eye of the beholder.

Treasury Secretary Tim Geithner is abandoning his cherubic, soft-spoken mien for a more tough-guy approach with Wall Street and bankers in general.

That was seen today in Geithner disabusing the Street’s investment banks from the idea that they get to decide when they will pay the government back on funds received through the Troubled Asset Relief Program, or TARP. Geithner made it clear that the final call belongs to the Treasury and the Federal Reserve, and that banks would be allowed to pay back their TARP debt only if the entire banking system could bear it.

“‘My basic obligation is to make sure the system as a whole…has the ability to provide
the credit that recovery requires,’” Geithner said. Translation: the banks don’t decide their futures. The government decides….

The expected departure, which he has personally acknowledged, marks a sharp turnaround in Nardelli’s fortunes at Chrysler, where he was the choice of the company’s private-equity owner, Cerberus Capital Management, to turn around the auto maker. (Nardelli also had the support of his two past bosses, former General Electric CEO Jack Welch and former Home Depot Chairman Ken Langone.)

Nardelli was pushed out of his two previous executive jobs, usually by politics of some kind. At General Electric, CEO Jack Welch passed over the then-29-year GE veteran, who was known as “little Jack” for his faithfulness to his mentor, for the CEO position in favor of Jeff Immelt. That prompted Nardelli’s exasperated departure. As Nardelli told Fortune’s Patricia Sellers, “‘I went with my heart in my throat…How do you describe this? It’s something you strive for for 30 years. You’re hanging on every word. You’re focused on his mouth, and the final words: ‘I’ve elected to give it to Jeff.’ And you’re like, ‘Did I really hear it right?’ Unlike McNerney, who took his bad news in stride, Nardelli hammered Welch: ‘You’ve got to tell me why. Tell me what I could have done better. Tell me the numbers weren’t there, the innovation, the talent development, the relationships with the Street. Give me a reason.’ Welch said to Nardelli, ‘It was my call, and I had to go with my gut.’”

Nardelli’s status as a newcomer to the auto industry set him apart from entrenched leaders like former GM CEO Rick Wagoner. Back in that conversation with the WSJ’s Alan Murray, Nardelli said that if Cerberus wanted to sell Chrysler in the future, “that’s their deal.” In light of his imminent departure, how prescient those words now seem.

It’s tough to be too gloomy the day after the Dow industrials soared another 3%, but spare a moment’s thought for the unemployed.

It’s bad for them and will get worse. Unemployment will easily hit 10% by year end.

Of course, President Obama and his advisers don’t see it that way. They forecast unemployment topping out at around 9%. But why trust them? Of Obama’s 22 Cabinet level bigwigs, including the biggest wig himself, none has had a sustained private-sector career.

They’re government lifers. And they are living in a fantasy world of think tanks and policy papers where government spending magically leads to business hiring. Unfortunately, it doesn’t work that way.

Soon enough, Obama’s dreams of job creation will turn into an unending nightmare of double-digit unemployment. Look at the numbers. Thursday’s jobless claims hit a 26-year high. This morning’s jobs numbers were predictably awful. The economy lost 663,000 jobs in March, and unemployment jumped to 8.5%.

In Chrysler’s shotgun wedding to Italy’s Fiat, the U.S. government is bringing two shotguns.

Things already looked pretty bad for Chrysler, as the auto maker’s solvency was questioned by Senators including Tennessee’s Robert Corker. Now the government is punishing Chrysler to make sure that everyone knows the auto maker is in the midst of a fire sale.

Today brought a thick run of tough love from the government. First, as our colleagues pointed out today, “The government said it would provide Chrysler with capital for 30 days to cut a workable arrangement with Fiat SpA, the Italian auto maker that has a tentative alliance with Chrysler. If the two reach a definitive alliance agreement, the government would consider investing as much as $6 billion more in Chrysler. If the talks fail, the company would be allowed to collapse.”

Then the administration said that Chrysler would be split into a “good company” and a “bad company.” (Details are thin on how the government will make the determination; instead of using the old advice of following the money, perhaps the government will follow the fuzzy dice.)

President Obama wants to build up the nation’s infrastructure, starting with a $13 billion allocation in the stimulus bill. The nation’s investment bankers can’t wait.

That is why Evercore Partners, a Wall Street firm that offers advice to companies, has just hired George Ackert to start a business advising companies on mergers and acquisitions in the transportation and infrastructure sectors.

Ackert most recently was a banker with Bank of America Merrill Lynch, where he advised on the merger of Delta Air Lines and Northwest Airlines. He also ran the gambling, leisure and transportation group at Merrill Lynch before it merged with Bank of America; then he became global head of the Transportation & Infrastructure at Bank of America Merrill Lynch.

Ackert’s list of deals at Merrill Lynch was considerable. Evercore filled us in

The government wants private money to help support a national “aggregator,” or bad bank, as the Wall Street Journal reported today, but private-equity investors are going to be looking for signs the government is willing to work with them and not against them. Private-equity firms could play two roles in any plan: private firms, including [...]

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Deal Journal is an up-to-the-minute take on the deals and deal makers that shape the landscape of Wall Street, including mergers and acquisitions, capital-raising, private equity and bankruptcy. In short, wherever money changes hands. Deal Journal is updated throughout each trading day with exclusive commentary, analysis, data, news flashes and profiles. The Wall Street Journal’s David Benoit is the lead writer, with contributions from other Journal reporters and editors. Send news items, comments and questions to deals@wsj.com.

Dealpolitik is Ronald Barusch's strategic look at deals currently making the headlines as well as the major forces at work in the deal-making world. He was a M&A lawyer with Skadden, Arps, Slate, Meagher & Flom for over 30 years. He retired in 2010 after 25 years as a partner at the firm. Click here for his current and archived columns.